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Focus: 'Reasonable grounds' in suspicious matter reporting – the UK perspective

25 February 2009

In brief: In a recent decision, the High Court of England and Wales discussed the requirement to report suspicious matters under the UK Proceeds of Crime Act. The court rejected the argument that a suspicious matter report must be based on 'reasonable grounds'. However such a requirement does exist in Australia and Partners Peter Jones and Matthew McLennan (view CV) look at some of the issues that arise from such a requirement in light of the court's comments and guidance from the Australian Transaction Reports and Analysis Centre.

• The suspicious matter reporting obligation
• UK requirements and comments
• Australian requirements

The suspicious matter reporting obligation

In summary, the AML Act requires a reporting entity to report to AUSTRAC if it suspects on reasonable grounds (in connection with the provision of a designated service to a person) that:

• the person (or an agent of that person) is not the person who they claim to be;
• information it has concerning the provision of the service may be relevant to an investigation or prosecution for evasion of taxation law or of an offence against a law of the Commonwealth or of a state or territory, or may be of assistance in the enforcement of the Proceeds of Crime Act 2002 or a corresponding law;
• the provision of the service is preparatory to the commission of a money laundering or financing of terrorism offence; or
• information it has concerning the provision of the service may be relevant to an investigation or prosecution for a money laundering or financing of terrorism offence.

The key to the obligation is that the reporting entity both suspects a relevant matter and that it has reasonable grounds for that suspicion.

UK requirements and comments

In both the UK and Australia, reporting entities are required to report suspicious transactions to the relevant authority. A failure to lodge a suspicious matter report constitutes an offence under both the AML Act and UK Proceeds of Crime Act (the POCA). The POCA also effectively requires a reporting entity to obtain 'appropriate consent' to continue its involvement in the transaction. A further difference between the UK and Australian position is that the POCA does not require reasons for a relevant suspicion.

The High Court of England and Wales dealt with this issue in Shah & Anor v HSBC Private Bank (UK) Ltd ([2009] EWHC 79 (QB)). In this case, the claimants alleged that they suffered substantial damages arising out of delays by HSBC in executing four transfers from the claimants' account. Although HSBC did not give reasons for the delay, the underlying cause of the delay was that HSBC suspected that the funds in the claimants' account were criminal property. Before HSBC could proceed with each transaction, it had to make an authorised disclosure to the relevant authorities and wait for appropriate consent under the POCA. The claimants argued that the reporting obligation was not triggered under the POCA unless HSBC had reasonable grounds for their suspicion. If no reporting obligation existed, HSBC could have been in breach of their contractual obligation to act in accordance with the customers' instructions and hence liable for damages. The court held that the issue of suspicion under the POCA is a purely subjective matter. There was no legal requirement that reasonable grounds exist for the suspicion. It was, therefore, only open to the claimants to assert that the suspicion was held dishonestly or in bad faith. As no such assertion was made, their damages claim could not succeed. This was the case even if the suspicion was not based on reasonable grounds. Under the POCA a genuinely held suspicion is sufficient to give rise to an obligation to report.

The court criticised the claimants' argument that the suspicion must be reasonably held stating that 'to impose a superadded requirement of reasonableness would put a banker in an impossible position and mean that he could be in breach of duty even though he was acting as the law compelled him to. That would be neither sensible nor principled.'

Significantly, the AML Act requires that there be 'reasonable grounds' for a reportable suspicion. The court in Shah commented on this requirement noting that there are good and practical reasons why requiring 'reasonable grounds' is not appropriate. The court stated that 'unlike law enforcement agencies, banks have neither the responsibility nor expertise to investigate criminal activities to satisfy themselves that the grounds for their suspicion are well founded, reasonable or rational.'

Australian requirements

Since 12 December 2008, reporting entities are required to report suspicious matters to AUSTRAC under section 41 of the AML Act. The reporting obligations under the AML Act largely replace similar obligations under the Financial Transactions Reports Act 1988 (the FTR Act) under which a cash dealer must make a report if they have 'reasonable grounds to suspect' that information that the cash dealer has concerning the transaction may be relevant to:

• an investigation of evasion of a taxation law;
• an investigation of, or prosecution for, an offence against a law of the Commonwealth or of a territory;
• enforcement of the proceeds of crime legislation; or
• financing of terrorism.

Although the 'reasonable grounds' requirement in the FTR Act is similar to the AML Act, it is not identical. However AUSTRAC, in Public Legal Interpretation No 6 of 2008 – Suspect Transactions and suspicious matter reports, concludes that the requirement of 'reasonable grounds to suspect' in the FTR Act and 'suspects on reasonable grounds' in the AML Act are essentially the same. That is, the reporting entity must have a 'real suspicion of the relevant matters [the subjective element] and the suspicion must be based on matters or evidence that support the truth of the suspicion [the objective element]'. A suspicious matter report to AUSTRAC under the AML Act must also contain a statement of the grounds on which the reporting entity holds the relevant suspicion. Although the AML/CTF Rules may specify matters that are to be taken into account in determining whether there are reasonable grounds for a reporting entity to form a suspicion, to date no matters have been specified.

Though they may be influential, AUSTRAC's views on the interpretation of the AML Act have no legal effect. There may be better guidance in judicial decisions concerning the meaning of the expression 'reason to suspect' in the context of regulatory investigations. In the leading decision of Commissioner for Corporate Affairs v Guardian Investments Pty Limited [1985] VR 1019, Justice Ormiston adopted the description of the subjective element of the test given by the High Court in Queensland Bacon Pty Limited v Rees (1966) 115 CLR 266. In that case, it was observed that 'suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence"'. Justice Ormiston adopted this approach, emphasising, however, that a 'suspicion' does not necessarily amount to a 'belief' that something is the case.

As for the objective element of the test, C's reference to 'matters or evidence that support the truth of the suspicion' may be an overstatement of the burden. In light of the authorities referred to above, the better view may be that what is required is a just cause for the suspicion - something which in all the circumstances would create in the mind of a reasonable person in the position of the reporting entity, an actual apprehension of a matter that had to be reported. The truth of the suspicion is not necessarily relevant.

Each of the cases we have referred to, and the cases cited by AUSTRAC in its Public Legal Interpretation, concerned other pieces of legislation. It is quite possible that a court interpreting the AML Act will adopt a different approach. In particular, and in light of concerns of the kind expressed in the Shah decision, the court may lower the 'reasonable grounds' threshold having regard to the circumstance that 'banks have neither the responsibility nor expertise to investigate criminal activities to satisfy themselves that the grounds for their suspicion are well founded, reasonable or rational'.

Until this issue is clarified, however, the 'suspect on reasonable grounds' test may cause difficulties for reporting entities. Unlike the English bank in the Shah case, an Australian reporting entity will need to establish that the grounds for its report to AUSTRAC were reasonable. As a practical matter, the reporting entity will probably be able to rely only on the grounds specified in its report - it will be difficult to persuade anyone that a ground was in fact relied on if it is not specified.

In order to protect themselves, reporting entities should put in place robust processes for the reporting of suspicious matters to AUSTRAC. Those processes should:

• identify who is responsible for deciding when to make a report;
• provide for that person to be trained in the entity's reporting obligations and how to fulfil them in practice;
• address how relevant information is to be made available to him or her;
• set out a regime for ensuring that all grounds relied upon are captured in the report to AUSTRAC; and
• if practicable, provide for peer review of such reports to check both that the grounds relied upon are reasonable and that they are all set out in the report.

If you have any queries about suspicious matter reporting or would like any other information, please contact any of the people below.

Published 25 February 2009

For further information, please contact:

• John BeckinsalePartner, Brisbane
  Ph: +61 7 3334 3520
  John.Beckinsale@aar.com.au
• Matthew McLennanPartner, Sydney
  Ph: +61 2 9230 4732
  Matthew.McLennan@aar.com.au